ICRA: Frontloading of PSBs capital infusion is positive but capital requirements are more than GoI’s allocation

In ICRA’s view, the frontloading of the capital infusion for FY2017 is positive and will immediately support the PSBs capitalisation levels. However, on an overall basis, ICRA estimates the PSBs Tier 1 capital requirements to be in the range of Rs 400-500 billion[2] for FY2017, which is higher than GoI’s current allocation of Rs 229 billion equity infusion. This shortfall in allocation could continue to impact the PSB’s loan book growth in FY2017 as the possibility of large quantum of capital raising from non-government sources remain limited as of now and PSBs internal capital generation is likely to remain muted on the back of significant pressure on their asset quality.

The Government of India (GoI), on July 19, 2016, announced a capital infusion of Rs 229.15 billion to 13 public sector banks (PSBs) for FY2017. Out of this, 75% would be infused immediately while the balance 25% would be infused later subject to the banks’ performance with particular reference to greater efficiency, growth of both credit and deposits and reduction in the cost of operations.

According to Karthik Srinivasan, Sr. VP, Co-head, Financial Sector Ratings, “as the credit growth in FY2017 is likely to remain moderate, the challenges of capital requirements would increase over the medium term (FY2018 and FY2019). In ICRA’s estimate PSBs would need Tier 1 capital of Rs 1.7-2.1 trillion over FY2017-FY2019. Given the weak share price multiples and subdued investor appetite for common equity (CET 1) and Additional Tier 1 (AT1) instruments of PSBs, GoI will need to increase the quantum of capital infusion into PSBs significantly for the period of FY2017-FY2019”.

Out of 21 PSBs, 13 PSBs have been allocated equity; the list includes the large PSBs and those with relatively weak on Tier 1 capital levels as on March 31, 2016. The capital allocation reiterates the Government’s stance that it will continue to support the PSBs as reflected in the higher allocations to the relatively weaker PSBs with low capitalisation levels (refer table 1). Apart from funding growth, the capital infusion will also partly improve the weaker PSBs’ ability to service the hybrid debt capital instruments raised by them in the past.

The eight PSBs which have not been allocated capital in this round had relatively better Tier 1 capital levels as on March 31, 2016 i.e. Andhra (Tier 1 at 8.5% as on March 31, 2016), BoB (10.8%), BoM (9.0%), IDBI (8.9%), Indian (12.1%), OBC (9.1%), P&SB (9.3%) and Vijaya (9.5%).

On an aggregated basis, PSBs’ Tier I capital was at 9.1% as on March 31, 2016 vs. the regulatory minimum Tier 1 requirement of 9.5% by March 31, 2019. Seven of them reported Tier 1 capital of less than 8.25%, the minimum regulatory requirement for March 2017.